WRAPUP 5-U.S. employment growth slows sharply in May

The US economy may be in for a prolonged period of soft growth as employers hired the fewest number of workers in eight months in May and the unemployment rate rose to 9.1 per cent.

Nonfarm payrolls increased 54,000 last month, the Labor Department said, fewer than the most pessimistic forecast in the Reuters survey and just over a third of what economists had expected.

The employment report which showed broad weakness confirmed the loss of momentum in the economy already flagged by other data from consumer spending to manufacturing, and stoked fears the economy could be facing a more troubling stretch of weakness than had been thought.

“There are plenty of reasons to expect the third quarter will be better. But the question is now becoming how much better?," said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts.

Economists had pinned the economy’s sluggishness largely on high energy prices, supply chain disruptions stemming from Japan’s earthquake and tornadoes and flooding in the US Midwest and South. The department said it found “no clear impact" from weather on the jobs figures.

The private sector, which has shouldered the burden of job creation added just 83,000 jobs, the least since last June, while government payrolls dropped 29,000.

Adding to the gloomy labour market picture, about 39,000 fewer jobs were created in March and April than previously estimated.

“There was very little in the report that suggested the household sector has any reason to become more confident in the recovery and that in itself does not augur well for a future acceleration," said Patrick O’Keefe, head of economic research at J.H. Cohn in Roseland, New Jersey.

The sharp slowdown in job creation is troubling news for President Barack Obama, whose chances of re-election next year could hinge on the health of the economy.

RECESSION BOUND?

Economists said the report did not suggest the economy was heading into recession, but they said job growth could prove frustratingly slow.

“The recovery has not been aborted. The economy is not falling into a double-dip," said Sung Won Sohn, an economics professor at California State University in the Channel Islands.

“The supply chain related to the aftermath of the tsunami is returning to more or less normal. The price of crude oil has fallen, lowering the burden on consumers and businesses."

The optimistic view was captured in a separate report showing growth in the country’s services sector picked up in May. The Institute for Supply Management’s services sector index rose to 54.6 last month from 52.8 in April.

The employment data lent more fuel to talk about the need for the Fed to extend its asset purchasing program when it expires this month, but officials at the central bank have set a high bar for any further easing of monetary policy.

With the Obama administration and lawmakers discussing how best to trim the US budget gap, the economy could be left to its own devices.

US House of Representatives Speaker John Boehner on Friday urged President Barack Obama to take an active role in deficit reduction talks if he wants to reach an agreement this month.

High gasoline costs hurt consumer spending in the first quarter, restricting economic growth to a 1.8 per cent annual pace after expanding at a 3.1 per cent rate in the October-December period.

The economy has regained only a fraction of the more than 8 million jobs lost during the recession. Economists say payrolls growth above 300,000 a month is needed to make significant progress in shrinking the pool of 13.9 million unemployed Americans.

The rise in the unemployment rate from 9.0 per cent in April reflected discouraged workers who had been inspired by the pick-up in hiring in April re-entering the labour market.

“There is so much slack in the labor market it’s going to take a long time to get the unemployment rate down to between 6 and 7 per cent. That’s going to take years," said Stephen Bronars, a senior economist at Welch Consulting in Washington.

BROAD-BASED WEAKNESS

The employment report showed weakness across the board, with the private services sector adding 80,000 jobs last month after increasing payrolls by 213,000 in April.

Within the private services sector, leisure and hospitality fell, showing no boost from McDonald’s recruitment of about 50,000 new staff in April, which was after the survey period for that month’s payrolls. Spring is traditionally a strong hiring period for McDonald’s.

Retail employment, which recorded its largest increase in 10 years in April, fell 8500 last month. Manufacturing payrolls growth contracted 5000 last month, the first decline since October, while construction employment rose 2000.

The report showed the average work week steady at 34.4 hours and few signs of wage inflation, with average hourly earnings rising 6 cents.